Charles Schwab 2008 Annual Report Download - page 74

THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
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connection with the fund’s investment policy, disclosures and fund marketing. Defendants named in one or more of the
lawsuits include the Company, Schwab, CSIM, the fund itself, Schwab Investments (registrant and issuer of the fund’s
shares), Charles R. Schwab, Randall W. Merk (current president of the fund), and current and former trustees and officers of
the fund and/or Schwab. Claimants seek unspecified compensatory and rescission damages, unspecified equitable and
injunctive relief, and costs and attorneys fees. On July 3, 2008, the U.S. District Court for the Northern District of California
consolidated all nine lawsuits into a single action for purposes of pre-trial proceedings and appointed a group of fund
investors as lead plaintiff. On October 2, 2008, plaintiffs filed a consolidated amended complaint which seeks certification of
two separate classes of plaintiffs for the federal and state law claims. On February 4, 2009, the court denied defendants’
motion to dismiss plaintiffs’ federal law and certain state law claims, dismissed certain state law claims without prejudice, and
lifted a stay on discovery.
Total Bond Market Fund Litigation: On August 28, 2008, a class action lawsuit was filed in the U.S. District Court for the
Northern District of California on behalf of investors in the Schwab Total Bond Market Fund™. The lawsuit, which alleges
violations of state law and federal securities law in connection with the fund’s investment policy, names the fund, Schwab
Investments (registrant and issuer of the fund’s shares), Schwab, and CSIM as defendants. Claimants seek unspecified
compensatory and rescission damages, unspecified equitable and injunctive relief, and costs and attorneys fees. On
February 19, 2009, the court denied defendants’ motion to dismiss plaintiff’s federal law claim, and dismissed certain state
law claims with leave to amend.
SoundView Litigation: As part of the sale of Schwab Capital Markets L.P. and all of the outstanding capital stock of
SoundView Technology Group, Inc. (SoundView), (collectively referred to as Schwab SoundView Capital Markets, or
SSCM), to UBS, the Company agreed to indemnify UBS for certain litigation. SoundView and certain of its subsidiaries are
among the numerous financial institutions named as defendants in multiple purported securities class actions filed in the
United States District Court for the Southern District of New York (the IPO Allocation Litigation) between June and
December 2001. The IPO Allocation Litigation was brought on behalf of persons who either directly or in the aftermarket
purchased IPO securities between March 1997 and December 2000. The plaintiffs allege that SoundView entities and the
other underwriters named as defendants required customers receiving allocations of IPO shares to pay excessive and
undisclosed commissions on unrelated trades and to purchase shares in the aftermarket at prices higher than the IPO price, in
violation of the federal securities laws. SoundView entities have been named in 31 of the actions, each involving a different
company’s IPO, and had underwriting commitments in approximately 90 other IPOs that are the subject of lawsuits.
SoundView entities have not been named as defendants in these cases, although the lead underwriters in those IPOs have
asserted that depending on the outcome of the cases, SoundView entities may have indemnification or contribution
obligations based on underwriting commitments in the IPOs. The parties, with the assent of the District Court, selected 17
cases as focus cases for the purpose of case-specific discovery, and on October 13, 2004, the District Court allowed six of the
focus cases to proceed as class actions. Defendants appealed that decision to the United States Court of Appeals for the
Second Circuit, which issued an order on December 5, 2006 reversing the District Court’s decision to allow the six focus
cases to proceed as class actions. On April 6, 2007, the Court of Appeals denied the plaintiffs’ request for rehearing. In
August and September 2007, plaintiffs filed amended class action complaints and renewed motions for class certification,
which again seek approval for the cases to proceed as class actions. On March 26, 2008, the District Court denied defendants’
motion to dismiss the amended class action complaints, except with respect to certain claims of a limited number of plaintiffs
who sold securities at prices in excess of the initial offering price or who purchased securities outside the class period.
14. Financial Instruments Subject to Off-Balance Sheet Risk, Credit Risk, or Market Risk
Securities lending: Through Schwab, the Company loans client securities temporarily to other brokers in connection with its
securities lending activities. The Company receives cash as collateral for the securities loaned. Increases in security prices
may cause the market value of the securities loaned to exceed the amount of cash received as collateral. In the event the
counterparty to these transactions does not return the loaned securities or provide additional cash collateral, the Company may
be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its client obligations. The
Company mitigates this risk by requiring credit approvals for counterparties, by monitoring the market value of securities
loaned, and by requiring additional cash as collateral when necessary. The market value of Schwab’s client securities pledged